Seven West Media Limited (WANHY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Seven West Media Full Year Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Managing Director and CEO, James Warburton; and Chief Financial Officer, Jeff Howard, after an acknowledgment of country. [Presentation]

Seven West Media acknowledges the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. We pay our respects to Elders past and present and extend that respect to all First Nations people present today.

Good morning, everyone, and welcome to Seven West Media's full year financial results for 2022. I'm James Warburton, Managing Director and Chief Executive Officer of Seven West Media. And joining me today is our Chief Financial Officer, Jeff Howard. We'll take you through our results and the progress of our strategy and provide you with a trading update. After the presentation, we'll take questions from investors and analysts. The past year has seen Seven West Media emerge as one of the best-performing and fastest-growing companies in the Australian media sector. We're in the strongest financial position we've been in for over a decade, and we're well placed to continue that growth and build on our leadership positions. These results represent the best Seven TV EBITDA result in 11 years, the best EBITDA result for West Australian Newspapers in 5 years and our best group EBITDA result in 6 years. Seven is now the #1 network nationally in audience share, and we have converted that into the #1 position in revenue share. The diligent execution of our strategy over the past 3 years, the acquisition of the assets of the Prime Media Group and the strong growth of 7plus have created the undisputed market leader in the national total television market. That is across capital cities, regional broadcast and BVOD television. Our digital businesses, including 7plus, accounted for more than 40% of FY '22 earnings compared with just 2% 4 years ago. 7plus has outperformed the BVOD market, growing 57% year-on-year in a market that grew 47%. The EBITDA we have announced today of $342 million is ahead of the guidance we gave in early May of between $335 million and $340 million. On 31st of December last year, we completed the acquisition of the Prime Media Group assets. As flagged at the February 2022 interim results, the Board has assessed options regarding capital management during the second half. The significant improvement in our balance sheet over the past 2 years has enabled us to announce a share buyback to commence following the announcement of the FY '22 results. The on-market buyback will be for up to 10% of issued capital and will be highly earnings accretive for Seven West Media shareholders. We will talk through the progress of our transformation strategy we started 3 years ago. The financial results announced today clearly demonstrate the dramatic transformation our company has been through since late 2019. Our content-led growth strategy and our revitalization of our entertainment content schedule along with the ongoing success of our news, public affairs and sport have taken Seven to the #1 position nationally in audience and revenue. From a television content point of view, we started 2022 in a much better position than in recent years. Our focus this year is to be more consistent in our entertainment schedule and to win. The Seven network increased its share in every demographic during FY '22. At the same time, 7plus has become the fastest-growing platform in the BVOD market and now has more than 13 million registered verified users. We continue to explore our options in the subscription streaming market, and our discussions with potential content partners are ongoing. The transformation of our company has seen us implement the first phase of our investment in new dynamic trading platforms. We have also set up key commercial partnerships with the market-leading organizations to create richer audience insights for our advertisers. Our business is leaner and working smarter, delivering more revenue and earnings from a smaller cost base. Costs have been reduced by $200 million over the past 3 years, while at the same time, we have invested in content and on our digital platforms. The cost efficiency program we started in 2019 continues with a simple premise that every dollar we spend must generate a return. We will continue to invest in revenue-generating content and continue to ensure that everything we do makes sense financially. As mentioned earlier, digital earnings represent more than 40% of group earnings in FY '22. Seven West Ventures has been reactivated over the past year and now has a portfolio value of approximately $60 million with several new [ contra ] investments in the pipeline. We've had a clear strategy of reducing debt and improving our balance sheet flexibility. Net debt now stands at $256 million and represents 0.7x leverage, including the Prime acquisition. The integration of Seven and Prime is fully underway, and the Prime brand has been retired. Cost synergies will be at the top end of the $5 million to $10 million guidance we gave when the acquisition was announced last year, and we're seeing positive results in terms of revenue synergies. In the 2021 calendar year, Seven returned to #1 in TV for the first time in 3 years, while 7plus was #1 in BVOD for the second year in a row. We've retained both those titles so far in 2022. In the 2022 financial year, Seven was the most watched television network nationally and in the capital cities, and we achieved strong growth in the key advertiser demographics of people aged 25 to 54 and 16 to 39. Seven was also a dominant #1 in regional markets. In FY '22, we were #1 in total people and 16 to 39s nationally and less than 1 percentage point away from being #1 in 25 to 54s. Our content lineup for FY '23 is deep and strong. In addition to many returning hit programs across all genres, the 2022 Commonwealth Games on Seven and 7plus were very successful. 7plus was the #1 BVOD platform in FY '22 with a 43.4% share. In terms of total television revenue, Seven was #1 across the financial year with a 39.1% share. This clearly demonstrates our position as the undisputed leader in the national television market. The red area is Seven's the metro audience share week-by-week since the 1st of January this year. The gray area sitting on top of the red shows the audience share uplift regional gives us. The blue line is national audience share, and the yellow line is Ten's share. The Prime transaction created a powerful national television, print and digital company. Together, our business has reached 91% of all Australians every month. Seven is the #1 network nationally across total people and all key demographics. As stated in FY '22, we had a 39.1% share of total television revenue, including the Olympics. And our national sales proposition is gaining traction particularly with premium sponsorships of our major tentpoles, sport and unbeaten local news content across 20 different regions. Our ratings performance will underpin a national total television revenue share of 39% in FY '23, excluding the Olympics. For FY '24, we're targeting a 40% revenue share of the national total television market. Compared with FY '22, that represents approximately $40 million of upside. We'll do that by leveraging Seven's data and trading platforms to maximize inventory, utilization and management, which has already started. There is also a clear opportunity to drive greater premium integrated revenue at Prime. The rapid growth of the BVOD market is fueling the growth of the total television ad market. PwC's 2022 outlook report predicted that total television ad market will grow from $3.7 billion in calendar '21 to $4.4 billion in calendar 2026. That represents a compound annual growth rate of 3.6%. The BVOD segment of total television is predicted to jump from $359 million in 2021 to $1.56 billion in 2026, a compound annual growth rate of 34%. This is a significant uplift compared to the same forecast this time last year as the chart shows. This chart clearly demonstrates the dramatic growth in our digital earnings from $6 million in FY '18 to $139 million in FY '22. We are pivoting to growth markets. Our 7plus platform has been a key focus in recent years, and it's a remarkable success. It's the #1 BVOD platform in Australia in terms of its share of viewing, and it has more than 13 million registered verified users. Since the acquisition of Prime, 7plus has seen a 60% jump in its number of regional users and a 100% increase in minutes watched in regional markets. The 13 million plus users of 7plus are in an incredibly powerful marketing platform. When big data is overlaid and in our case, 6 billion data points, marketers have a remarkable addressable medium which delivers quality video with big data, all in a brand-safe environment. We have very clear priorities and goals for Seven Digital in FY '23. The first issue centers on prominence. Before the federal election, the Labor Party committed to regulate prominence. Now it is in government we're engaging, so it can be legislated as quickly as possible. Another important issue is the anti-siphoning list, which ensures all Australians have access to the sport they love for free. Our industry is engaging with the government to ensure the anti-siphoning list reflects changes in the way people are consuming television to prevent sports being locked behind subscription streaming services. Another key priority for 7plus is increasing engagement and consumption by its millions of registered users. New BVOD-exclusive content is also being added to 7plus on a regular basis. We're also upgrading 7plus to better customize the content curation window based on user preferences and data. We're aiming for a 25% increase in engagement over the next 2 years. 7plus is a powerful platform for advertisers, and we're aiming to make it even more powerful with the CODE 7 trading platform. CODE 7 will maximize our inventory utilization and yield. The first phase of its introduction will be completed during this calendar year. The second phase will be completed in FY '25. Once complete, it will run across broadcast and digital and will simplify the buying process, support converged buying, optimize inventory by increasing availability and drive greater revenue from improved yields. The total investment in CODE 7 is $40 million, with an expected payback period post implementation of 2.5 years. Turning to our cost outlook. Given some of the major one-offs, including the Olympics and the acquisition of Prime Media Group's assets, we have again provided a cost bridge to guide investors and analysts on our cost outlook. Normalized costs in FY '22 were $1.16 billion, taking into account one-off adjustments and the inclusion of the first half of Prime costs. Looking into FY '23, we expect inflation to be within the 1% to 2% range that we've previously called out despite the external market pressures. There has been a spike in paper costs, which has resulted in a material uplift for WAN in FY '23. However, we have identified a number of cost reductions which implies a normalized FY '23 cost base of $1.17 billion to $1.19 billion. We do have a couple of one-offs and special events in the period, which means our reported costs will be in the range of $1.2 billion to $1.22 billion. The Commonwealth Games is self-explanatory as a special one-off event. The extra week in FY '23 is due to us realigning our financial year to report on the period 1 July to the end of 30 June going forward from FY '24. This will result in a one-off adjustment in FY '23 where we'll be reporting on 53 weeks. On Slide 13, we provide a high-level net debt bridge from FY '21 to FY '22. The acquisition of Prime-associated transaction costs and new investments totaled $108 million in the financial year. We generated $342 million of EBITDA. However, this period, as we have previously flagged, will be impacted by onerous provisions particularly from the Olympics and Cricket. Net debt for the period ended at $256 million, 0.7x net debt to EBITDA and up $16 million in the year. The significant improvement in our balance sheet over the past 2 years has enabled us to announce an on-market share buyback for up to 10% of the issued capital, which will be highly earnings accretive for Seven West Media shareholders. The on-market share buyback program will be conducted on an opportunistic basis over the coming 12 months. Should Seven West Media fully complete the proposed share buyback, leverage is forecast to remain within the group's target leverage range of between 1 to 1.5x. The buyback will be funded out of existing debt facilities. The 3-year strategy that started in late 2019 has significantly transformed our company, creating a much simpler, stronger and more profitable total television, digital and print business. Our top line plan for the next 3 to 5 years is outlined on this slide, which draws together some of the things we have already mentioned. Put simply, our aim is to diversify and scale the business to reduce risk and to grow. We'll continue to build a more diversified media organization. We'll remain focused on being audience-led and digital first powered by data and tech. We will step up our focus on monetizing total television audiences. That is across broadcast, digital and include material non-advertising revenue, such as subscription. Our low gearing gives us capacity for growth in capital management initiatives. We'll continue to invest in the business and focus on generating strong cash flows while also investing to drive growth across the business and diversify the portfolio of assets. I'd now like to hand over to Jeff to talk you through our financial results in more detail.

Thank you, James, and good morning, everyone. Total group revenue and other income of $1.54 billion for the year was $270 million or 21% higher year-on-year. This reflects one half contribution from the Prime Media Group assets and the impressive level of growth across all our operating markets as well as share gains. Operating expenses, including depreciation and amortization, were $1.23 billion, which includes $33 million of D&A. Reported operating expenses, excluding D&A, were $1.2 billion, which was at the midpoint of the guidance range. EBIT before significant items was up 35% to $309 million. Underlying net profit after tax before significant items was $201 million, 60% higher than the same period last year. Significant items before tax of $10 million were recorded in the period. Slide 16 provides an overview of the performance of the Seven segment, which includes our broadcast and digital businesses plus program sales earnings. In the 2022 financial year, Seven returned to the #1 position in ratings and revenue and delivered its strongest financial result since the 2011 financial year. We've been calling out our focus on improving the ratings and revenue performance in the second half. I'm pleased to report we are seeing the benefits beginning to come through. Given the lag effect we have talked about, we would expect to see incremental gains in the second half of '23 as we monetize our stronger ratings performance. All markets that we operate in performed strongly in the financial year with BVOD the standout, up 47%. 7plus growth beat the market, up 57% for the same period. Metro advertising share grew 2.7 percentage points in the year, and we think we're strongly positioned to hold 39% in 2023. Operating costs in the period were up 19.4%, which, as outlined earlier, included the first 6 months of consolidation of the Prime Media Group assets and the costs associated with Tokyo Olympics and increased content investment as planned. EBITDA was up 39% to $328 million, comprising of $139 million digital EBITDA, up 129%, which exceeded our previous target of $130 million in the 2022 financial year. Seven's digital revenue and earnings also included the first full year contribution from the associated Google and Facebook digital platform news deals. Excluding digital, broadcast and program sales EBITDA grew 8% year-on-year. Seven recorded $39 million of earnings from program sales in the period, with this income source continuing to hold up well. WAN delivered its strongest EBITDA result since FY '17 with digital growth plus their contribution from the Google and Facebook deals more than offsetting the decline in print. From an operational perspective, the trends remained similar. Digital audiences and subscription penetration are growing, while the company continues to focus on maximizing the profit from print. The retail advertising market continues to perform strongly, but travel, motor and real estate have yet to recover to pre-pandemic levels. Revenue grew 4.4% to $169 million. Operating costs increased 1.4%. However, after adjusting for temporary savings in the '21 financial year, underlying operating costs were down 5%. WAN's EBITDA grew 18% to $34 million in the financial year. Other and corporate costs have increased due to one-off savings in 2021 and the divestment of a number of assets. In the 2022 financial year, other and corporate costs reported an EBITDA loss of $20 million. We believe these earnings set a more realistic expectation for this division going forward. On Slide 18, we have the statutory group financial results and the reconciliation from EBIT before significant items. Seven West Media reported a statutory profit after tax of $211 million and basic earnings per share of $0.133. Excluding significant items, underlying earnings per share was $0.127. Slide 19 shows group cash flow for the year. Seven West Media recorded operating cash flow of $203 million for the year, which was marginally higher than the previous year. As previously discussed, this was the result of working capital outflows in the period mainly due to Olympics and Cricket onerous. We've outlined on the right-hand side of this slide the future outflows associated with the onerous contracts, which eventually fall away to less than $5 million in FY '25. The onerous contracts should have corresponding cash outflows in these future years. Other notable callouts in the period include tax paid, which remains below P&L tax but should normalize in the future years. CapEx was $27 million versus guidance of $40 million, which was due to slight delays in the news colocation project. We expect CapEx in '23 to be circa $40 million, which will include the full year of Prime CapEx. As flagged, the next investment [ installment ] in project CODE 7+ will be made in FY '23 for approximately $20 million. We expect this to be treated as a significant item for accounting purposes. Statutory net debt at the end of the period was $256 million. I'll now hand it back to James to finish with the trading update.

Thanks, Jeff. Turning to the trading update on Slide 21. Our first quarter ad bookings are skewed due to the Tokyo Olympics last year, but we estimate the overall total television market is [ about ] 2% excluding the Olympics and 7% if you were to include it. Visibility into the second quarter is actually improving, which we believe may be due to tight inventory market last year and advertisers now looking to seek and secure placement. While still early, current total television forward bookings for the second quarter are positive year-on-year. These total television estimates include BVOD, which we expect to maintain robust earnings growth. Our ratings performance is expected to drive a TV ad revenue share of 39% in FY '23. Seven Digital is on track for another year of strong revenue and earnings growth, and this will include consistent revenue contribution from the digital platform news revenue as in the FY '22 year. Our FY '23 group operating costs will be in the range of $1.2 billion to $1.22 billion. We will provide a further update on the market at our AGM in November this year. That concludes the presentation. Thank you for your time. And before we take questions, here is a preview of Farmer Wants a Wife for 2022. [Presentation]

[Operator Instructions] The first question comes from Darren Leung from Macquarie.

Congrats on a good result. I just have 2 on my end, please. One is just on that market share aspiration into FY '23. So you've obviously had the Commonwealth Games so far this half. So I'm curious to understand how you're thinking about the path towards revenue market share gains, notwithstanding the good [ content base ] you've just shown up there. And then the second question is just in terms of your first quarter trading update, can you give us the split as to what that looks like in [indiscernible]?

Sure. Thanks, Darren, for the questions. I think from an overall market perspective, I think we've been very, very clear that we've been building a schedule and building not only in total people leadership position but building the demographics. And so when you look at us nationally, essentially, across the survey year, in particular, we're leading in total people. We're leading in 25 to 54, and we're leading in the 16 to 39. So as per this result, the Seven network is gaining share and gaining share quite impressively. Obviously, the Commonwealth Games really helped that to kick off the year from that perspective. I think -- we really think about the businesses as one business. We're selling in a converged way not only nationally but also selling with BVOD. But obviously, as you saw on the PwC report that there's a pretty specific breakout between linear television and where it's heading and obviously, the CAGR of 34%. I don't know if you can add any more flavor to that, Jeff?

Yes, in terms of market, Darren, [ SMI ] yesterday [ had market in ] Metro down about 16%, 17%, which I think a few people called out. Regional markets weren't anywhere near as bad as that. They were down sort of mid-singles, and then BVOD was lower than that again. So pretty diverse mix from a different segment perspective. And from our perspective, July numbers weren't that different to those.

The next question comes from Tom Beadle from UBS.

Good results and just well done on [ positioning ] the business for growth going forward. Look, just firstly on current trading conditions. Just wondering if you could just give more color just on the ad market, please. Are there any advertiser categories worth calling out? And also, I'd be interested to hear any feedback on how inflation might be impacting advertisers. Is there any evidence that advertisers might be pulling back to cut back on costs? Or are they actually continuing to advertise to maintain sales if they're passing costs onto their customers? And just a second question just around capital management. Obviously, that buyback is really good to see. Just wondering the reasons why that option was chosen. And how should we think about capital management going forward?

Thanks, Tom. Yes, look, I think overall from an advertising market point of view, I think the reaction to what could have happened was probably a little bit overblown. So you've got, obviously, the numbers there from that perspective. But I think, again, relatively what we're seeing is an incredibly strong sort of focus forward in terms of Q2. Retail is very strong. All those primary drivers of free-to-air are sort of pretty strong sort of through that sector. We're seeing a lot come back in terms of tourism and travel. And travel is a little bit cyclical depending on what the airlines do, but we're seeing very, very strong bookings coming through. Things like cruising getting back in, all the government spending in terms of the destination stuff as well. Wagering is very strong, and a lot of briefs around automotive for the start of 2023 calendar as well. All the agency groups and all the conglomerates we speak to, and they've all put out their individual, I suppose, perspective on the market, have all indicated that they'll sort of be up year-on-year. And obviously, Q2, in particular, as we said, grew by 1.5% last year. So it's a lower benchmark, but we think it's -- we're certainly trading from a positive perspective. Market is still 6 to 8 weeks, which is strong. And I think, hopefully, we can be in a position by the AGM to give sort of a stronger level of guidance from that perspective. And I think, again, from a capital management point of view, it -- obviously, everything was discussed with the Board level, and the directors felt that where our share price was trading, it was the best use of capital at this time. And of course, all the other options sort of remain in the [ kit bag ], so to speak. And we've said quite consistently that we feel comfortable between 1, 1.5x in terms of leverage.

The next question comes from Entcho Raykovski with Crédit Suisse.